Expanding Customer Base And Strong Risk Management To Drive Future Success

Key Takeaways

• Strategic focus on expanding customer base and reputation for service is expected to drive revenue growth and activate new lenders.
  
• Commitment to high-quality portfolio and disciplined risk management anticipated to sustain credit performance and improve net margins.
  
• Elevated interest rates and disaster-related loan defaults threaten revenue growth and margins through reduced insurance volumes and increased claims expenses.

Catalysts

Provides private mortgage guaranty insurance services in the United States.

• NMI Holdings plans to continue innovating in capital and reinsurance markets with successful quota share and excess of loss treaties. This strategy is aimed at extending the company's comprehensive credit risk management framework, potentially improving net margins and earnings.
  
• The company is focusing on further customer development, aiming to activate new lenders and expand their customer base. This focus, alongside a strong reputation for customer service, is expected to drive revenue growth.
  
• NMI Holdings is committed to maintaining a high-quality, high-performing insured portfolio and will continue to prioritize discipline and risk management. This approach is expected to sustain credit performance and impact net margins positively.
  
• With an increase in authorized share repurchase capacity, NMI intends to drive value for shareholders by repurchasing shares, which should increase earnings per share over time.
  
• The company's strong balance sheet, significant earnings power, and continued momentum in private MI market opportunities suggest a robust platform for through-the-cycle growth, which is expected to enhance book value and revenue.

NMI Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NMI Holdings's revenue will grow by 6.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 55.3% today to 53.7% in 3 years time.
• Analysts expect earnings to reach $415.7 million (and earnings per share of $5.32) by about March 2028, up from $360.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.2x on those 2028 earnings, up from 7.5x today. This future PE is lower than the current PE for the US Diversified Financial industry at 16.2x.
• Analysts expect the number of shares outstanding to decline by 2.27% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.27%, as per the Simply Wall St company report.

NMI Holdings Future Earnings Per Share Growth

Risks

• Elevated interest rates pose a headwind to the mortgage market, which could negatively impact new insurance written (NIW) volumes and subsequently affect future revenue growth.
  
• The threat of natural disasters, such as hurricanes, has led to an increase in loan defaults, especially in FEMA-declared disaster areas, potentially raising claims expenses and lowering net margins.
  
• Increasing claims expenses, as seen with the rise from $10.3 million to $17.3 million, could pressure margins, given they are a substantial component of underwriting costs.
  
• A narrowing of profit commissions due to changes in claims experience could affect the net yield from reinsurance agreements, influencing overall earnings.
  
• Persistency rates above 84% limit the pace of portfolio turnover, potentially slowing the uptake of new premiums and constraining revenue growth opportunities.

Valuation

• The analysts have a consensus price target of $42.5 for NMI Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $47.0, and the most bearish reporting a price target of just $36.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $774.4 million, earnings will come to $415.7 million, and it would be trading on a PE ratio of 9.2x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of $34.63, the analyst price target of $42.5 is 18.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.